OpenText Corporation: Q2 Fiscal 2022 Form 10-Q Summary
Business context and reporting period
OpenText provides information-management software and services across cloud, content, business networks, experience, security and developer solutions. The filing covers the quarter and six months ended December 31, 2021, the second quarter of Fiscal 2022. Results are presented in U.S. dollars under U.S. GAAP.
During the quarter, OpenText acquired Zix Corporation for total consideration of approximately $896.0 million and Bricata Inc. for approximately $17.9 million. Zix was consolidated beginning December 23, 2021 and Bricata beginning November 24, 2021.
Key financial metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Change |
|---|---|---|---|
| Total revenue | $876.8 million | $855.6 million | +2.5% |
| Recurring revenue | $699.8 million | $684.9 million | +2.2% |
| Cloud services and subscriptions | $364.9 million | $350.5 million | +4.1% |
| Gross profit | $615.6 million | $603.1 million | +2.1% |
| GAAP gross margin | 70.2% | 70.5% | Down 0.3 points |
| Income from operations | $192.9 million | $234.5 million | Down 17.7% |
| GAAP operating margin | 22.0% | 27.4% | Down 5.4 points |
| Net income attributable to OpenText | $88.3 million | $(65.5) million | Improved from loss |
| Diluted EPS | $0.32 | $(0.24) | Improved |
| Non-GAAP net income | $242.1 million | $260.5 million | Down 7.1% |
| Adjusted EBITDA | $343.5 million | $360.8 million | Down 4.8% |
For the six months ended December 31, 2021, revenue was $1.709 billion, up 3.0%; GAAP net income attributable to OpenText was $220.2 million versus $37.9 million; diluted EPS was $0.81 versus $0.14; and GAAP gross margin was 69.6% versus 69.8%.
Professional services revenue increased 6.6% in the quarter, but its gross margin declined to 21.5% from 26.4% because of higher labor costs. Customer support revenue was essentially flat, with a reported renewal rate of approximately 94%. Cloud renewal rate, excluding Carbonite, was approximately 93%, compared with 96% in the prior-year quarter.
Cash flow, liquidity and capital structure
| Metric | December 31, 2021 | June 30, 2021 |
|---|---|---|
| Cash and cash equivalents | $1.512 billion | $1.607 billion |
| Total cash, cash equivalents and restricted cash | $1.514 billion | $1.610 billion |
| Total debt, carrying value | $4.221 billion | $3.589 billion |
| Term Loan B | $962.5 million | Not separately stated in the provided balance-sheet comparison |
| Revolver drawn | None | None |
| Consolidated net leverage ratio | 2.0:1 | Not stated in the filing excerpt |
- Six-month operating cash flow was $406.3 million, down from $516.4 million, primarily due to less favorable working-capital movements and lower tax-related cash benefits.
- Investing cash outflows were $896.1 million, including $837.6 million for Zix and $17.9 million for Bricata.
- Financing cash inflows were $419.8 million, reflecting $1.5 billion of new debt proceeds, debt repayments, share repurchases, dividends and debt issuance costs.
- OpenText issued $850 million of 3.875% Senior Notes due 2029 and $650 million of 4.125% Senior Notes due 2031, and redeemed its $850 million of 5.875% Senior Notes due 2026. The redemption generated a $27.4 million loss on debt extinguishment.
- The company paid $119.5 million of dividends during the first six months and repurchased and cancelled 1.81 million shares for $91.0 million. The quarterly dividend was increased to $0.2209 per share from $0.2008.
- Management stated that cash and available credit facilities are expected to fund working capital, contractual commitments, capital expenditures, dividends and operating needs for the next twelve months, although additional acquisitions could require further financing.
Material changes versus the prior comparable period
- Revenue growth was modest, led by cloud services and subscriptions, while customer support remained nearly unchanged.
- Operating income declined because operating expenses increased faster than gross profit. Sales and marketing expense rose 10.8% in the quarter, general and administrative expense rose 13.9%, and special charges shifted from a $17.5 million recovery to a $9.2 million charge.
- GAAP net income improved substantially because the prior-year period included a $267.6 million tax provision, primarily related to IRS settlements. The current-quarter tax provision was $39.3 million, producing a 30.8% effective tax rate versus 132.4% previously.
- Adjusted EBITDA and non-GAAP net income declined despite revenue growth, indicating pressure from higher operating costs and a less favorable expense mix.
- Debt increased materially to finance the Zix acquisition and refinance existing obligations. Goodwill increased to $5.195 billion from $4.692 billion, principally due to the Zix and Bricata acquisitions.
- Foreign-currency translation reduced other comprehensive income by $31.4 million in the six-month period, compared with a $48.7 million gain in the prior-year period.
Guidance, outlook, commentary and risks
Management did not provide specific full-year revenue, earnings or cash-flow guidance in the filing text. Its stated Fiscal 2022 and Fiscal 2023 priorities are growth in earnings and cash flow, higher recurring revenue, margin expansion, continued cloud modernization and disciplined acquisitions under its “Total Growth” strategy. Fiscal year-to-date research and development spending was 11.9% of revenue, within the stated target range of 12% to 14% for the fiscal year.
- COVID-19 continues to create uncertainty around customer purchasing decisions, operations, supply and staffing, although management expects substantially modified work and customer-interaction practices to continue through Fiscal 2022.
- Integration of Zix and realization of expected synergies may require substantial management resources and could result in additional restructuring costs, customer losses or execution delays.
- The CRA is disputing OpenText’s Canadian transfer-pricing positions for Fiscal 2012 through Fiscal 2016. Management estimates potential liability of approximately $73 million for penalties, interest and provincial taxes, after available tax attributes; approximately $33 million had been provisionally paid.
- For Fiscal 2017, the CRA issued a reassessment that could require a reduction of deferred tax assets by up to approximately $470 million if OpenText is unsuccessful. No accrual has been recorded, and any cash-tax impact would primarily occur over future years.
- The Carbonite securities class action was remanded for further proceedings after an appellate reversal. A separate patent lawsuit involving Carbonite remains unresolved; no loss has been accrued because management considers an unfavorable outcome not probable and cannot estimate a loss range.
- Interest-rate exposure is concentrated in the Term Loan B; a one-percentage-point increase would increase annual interest expense by approximately $9.6 million based on the December 31, 2021 balance.
- Other principal risks include foreign-exchange volatility, cybersecurity and privacy compliance, intellectual-property claims, competition, customer retention, acquisition execution, tax audits and access to capital.
Important facts for investors to verify
- Whether Zix integration produces the expected recurring-revenue growth, cost synergies and margin benefits.
- Whether cloud renewal rates recover from the reported 93% level and whether recurring-revenue growth accelerates.
- The sustainability of operating cash flow after the acquisition-related cash outflows and changes in working capital.
- Debt reduction plans, Term Loan B refinancing or maturity risk, floating-rate exposure and compliance with the 4.0:1 net-leverage covenant.
- The ultimate outcome and financial-statement impact of the CRA reassessments, particularly the potential $470 million deferred-tax-asset reduction.
- Progress and potential exposure in the Carbonite securities and patent litigation matters.
- The reconciliation of GAAP results to non-GAAP measures, especially the substantial amortization, share-based compensation, special-charge and tax adjustments excluded from non-GAAP earnings.